Risks and uncertainties
Exposure to risks is part of the business. This is reflected in Addtech's ongoing risk management work, which aims to identify and measure risks and prevent them from occurring, and to continually make improvements, thus reducing potential risks. Our risk management focuses on business risks, financial risks and other potential material risks, such as legal risks. Assessments of the operation's risk take place in all units. The Addtech Group has internal rules in the form of policies and instructions that give the responsible managers tools with which to identify and follow up the progress of the operation and to detect deviations that could become risks. Monthly reports, in which the managers describe developments in their respective units, are a systematic way of following up the situation in our operations. In these monthly reports, 'warning flags' about negative deviations are raised or risks are identified.
Addtech's profit and financial position, as well as its strategic position, are affected by various internal factors within Addtech's control and various external factors over which Addtech has limited influence. Addtech's most significant risks are the state of the economy combined with structural changes and competition.
In addition, Addtech is affected by financial risks such as transaction exposure, translation exposure, financing risk, interest rate risk and credit and counterparty risk. See Note 3 for a more detailed description of how Addtech manages financial risks.
State of the economy
The markets in which Addtech is active largely follow general industry trends. The past year was a turbulent one in large parts of Europe, and the general state of the economy in industry was uneasy and relatively weak on many of our markets. Through the Life Science business area, trends in the national economy in general are important to the Group, because these trends partly govern the scope for investments and consumption in healthcare and research. In the Energy business area, public investments in infrastructure - primarily in electricity distribution - have certain significance to the development of the Group. Addtech's sensitivity to the economy is reduced through geographic spread and industry diversity, in that the customers of Addtech's 130 or so operating subsidiaries work in different phases of the business cycle, and through a focus on multiple niche markets. Addtech's significant sales of technical service, support and consumables to the aftermarket, as well as to healthcare and laboratories, reduce the risk of fluctuations in the economy in individual industries having a major impact on the Group.
Structural changes in customers' operations
Structural changes and consolidation in customer channels constantly accentuate demand for value added in offerings from suppliers. Companies active in the market must be of sufficient size in terms of financial strength, service content and product offerings. In many industries, parts of production have been subcontracted. This involves risks as well as opportunities for Addtech, because a contract manufacturer could choose other suppliers, or new business opportunities could materialise.
Heightened internationalisation in the past ten years has brought about the relocation of high-volume production in particular from the Nordic countries to Asia. Addtech's companies normally focus on the low and medium-sized volume segment, and such operations therefore often remain in the Nordic countries and Europe. The Group's exposure to a large number of industries and the fact that no single customer accounts for more than 2 percent of consolidated sales also reduce the impact of individual companies potentially deciding to relocate abroad. Clear value added and the uniqueness of Addtech's offering to customers generate opportunities to deliver beyond the immediate geographic area as well.
Change and consolidation among companies in the technology trading industry are constantly altering the competitive situation. Economies of scale may pressure prices, but Addtech's strategy includes achieving market-leading positions in specific niches by offering products and services for which price is not the sole deciding factor. Many of the niches in which we operate are experiencing rapid technological development, involving a change in competition over time. Our companies have to be innovative and active in this movement in order to remain competitive on their markets.
Overall, Addtech's business has limited vulnerability to seasonal variations. Business activities normally follow the seasonal pattern of production industry operations, which means lower sales during the summer months. Based on historical results, just under half of the earnings are normally generated in the first two quarters of Addtech's financial year (April-September), and just over half in the last two quarters (October- March). Major divergences from this pattern may occur if conditions in the economy change rapidly during the course of a financial year or in the event of substantial acquisitions. In individual operations in Addtech Life Science and Addtech Energy, seasonal variations are more substantial.
The companies in the Addtech Group strive to be attractive employers and provide their employees with sound opportunities for personal growth. Internal recruitment is Addtech's most important tool for the supply of managers, and our employees are our most important competitive advantage. Our skilled employees are business professionals with high technological expertise. Understanding of customers' businesses is crucial and often leads to more in-depth cooperation and development. It is therefore important for Addtech to constantly attract new employees and be able to retain our skilled employees. The Group therefore works long-term on several levels to increase knowledge transfer internally, help its employees to continue growing and refine its corporate culture.
For many years, the Group has been running its own Business School. It covers all employees and constitutes a key platform from which to convey corporate culture, enhance business acumen and raise the degree of professionalism among employees. The Business School creates scope for both personal and professional growth. The Group's deeply rooted decentralised corporate culture and entrepreneurship are additional important success factors for us.
The Group conducted its second employee survey during the financial year. This forms part of our heightened focus on conducting operations that are sustainable in the long term. The purpose of the survey is to find out how employees view the subsidiaries as employers, their work situation and what might potentially require further improvement and development in the individual companies and at Group level.
In conjunction with acquisitions, the Group places particular emphasis on motivating and ensuring long-term commitment from key people in the acquired company.
Changes in sales volumes
A small increase in volume in the Group's various operations can be expected to boost operating profit in line with the gross margin in that business. However, after a certain increase, the operation reaches a level of resource utilisation at which resources must be expanded. Incremental effects arise and tend to reduce the increase in earnings from additional volume to a level that eventually approaches the operating margin. When volumes decline, the negative effect on operating profit in the short term may be assumed to be greater than the corresponding positive effect of greater volumes. Action must be taken to deal with this negative effect so that, in the slightly longer term, it approaches the operating margin. It should also be noted that the Group's different businesses operate under varying conditions with respect to gross margins and resource utilisation, for instance. This leads to different possibilities of coping with volume growth within the framework of existing resources, or of reducing resources in the event of decreasing volumes. The effects shown should be seen as indications of more short-term effects only and do not include any effects of offsetting actions that the Group would take in such eventualities. The calculation below of effects of factors such as changed sales volume has therefore only taken into account a higher or lower contribution margin, not whether adaptation of the number of employees or other overheads needs to be adjusted accordingly.
|Profit/loss items||Change||Effect on operating profit|
|Sales volume||+/-5%||+/-88 SEKm|
|Cost of sales||+/-1%||-/+32 SEKm|
|Payroll expenses||+/-1%||-/+9 SEKm|
|Overheads, not including payroll expenses||+/-1%||-/+5 SEKm|
Addtech's overriding goal is to achieve growth combined with profitability. The Group's objective is earnings growth of at least 15 percent per year over the course of a business cycle. To achieve this we require a combination of organic growth and acquisitions. To ensure the success of our acquisitions, Addtech has a well-established process and structure for implementing the deals and integrating acquired companies into the Group effectively. All acquisitions involve a risk and it is not always certain that all acquisitions will prove favourable. Costs attributable to acquisitions may therefore be higher than expected and positive effects of acquisitions may sometimes take longer time to realise than expected. Acquired goodwill is tested annually for impairment. Goodwill testing takes place for each business unit. If goodwill is not deemed to have been correctly valued in such assessment, this may result in an impairment loss that would affect the Addtech Group's results.